Question

16.

A firm’s debt is publicly traded and recently quoted at 95% of face value. The debt has a total face value of $5 million and is currently priced to yield 6%. The company has 2 million shares of stock outstanding that sell for $10 per share. The company has a beta of 1.5. The risk-free rate is 3%, the market risk premium is 8%, and the corporate tax rate is 35%. What is the market value of the company’s debt? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be entered as 1000.50.)

17. A firm’s debt is publicly traded and recently quoted at 90% of face value. The market value of the company’s debt is $9 million. The market value of the company’s equity is $27 million. The book values of the company’s debt and equity are $10 million and $20 million, respectively. What is the equity capital weight that should be used to calculate the firm’s WACC? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit the % sign in your response. For example, an answer of 15.39% should be entered as 15.39.

Answer 1

16.

Face value of debt	$        5,000,000
Market value as a %age of face value	95%
Market value of debt	$        4,750,000	=95% * 5,000,000

17.

The market value of the company's debt = $ 9 million

The market value of the company's equity = $ 27 million

For the calculation of WACC, the market value are considered.

Hence, the equity capital weight that should be used to calculate the firm’s WACC = 27 / (27+9) = 75.00%